When 2-year and 10-year yields invert, ‘you’re supposed to be on recession watch, and we are,’ says DoubleLine chief
A “calamity” may be coming for markets, potentially in 2023, Jeffrey Gundlach, chief executive officer and chief investment officer of DoubleLine, warned Tuesday on stage at the Exchange ETF conference in Miami.
The Treasury market’s yield curve is signaling “trouble ahead,” Gundlach said, referring to the recent inversion of 2-year TMUBMUSD02Y, 2.495% and 10-year yields TMUBMUSD10Y, 2.777%, which historically has preceded a recession. The setup in the stock market is “very similar” to the one seen in the fourth quarter in 1999, he warned, in a reference to the lead-up to the bursting of the dot-com bubble.
The S&P 500 has been “massively juiced” by quantitative easing and low rates under central banking policy, according to Gundlach, who said that he favors stocks outside the U.S. “One of the hardest things” in the investment business is “to change after you’ve been right,” he said.
While the S&P 500 saw an unusually strong run over the past few years, it’s down so far in 2022 amid heightened concern over the Russia-Ukraine war and expectations for the Federal Reserve to battle soaring inflation in part through interest rate hikes. Gundlach said he expects that European stocks will outperform the U.S., particularly when a recession arrives.
When 2-year and 10-year yields invert, “you’re supposed to be on recession watch, and we are,” said Gundlach, who is known as the bond king. “I am not looking for a recession this year because it takes time.”
The yield on the 2-year Treasury note briefly exceeded the 10-year yield recently. A persistent inversion of that measure of the curve has been a reliable predictor of recession, though typically with a lag of more than a year.
The fact that 10-year yields have moved back above 2-year yields “is not a cause for celebration if you’re looking for economic growth,” said Gundlach, who also sees the disinversion as a cause for concern.
Meanwhile, the cost of living is “much higher” than the rise captured by the consumer-price index, according to Gundlach, who said wage growth and rising rents will be important drivers of inflation this year.
The consumer-price index jumped 1.2% in March, fueled by the higher cost of gasoline, food and housing, according to a statement Tuesday from the U.S. Bureau of Labor Statistics. It was the largest monthly gain since Hurricane Katrina in 2005, driving inflation over the past year to 8.5% — the highest since January 1982.
Read: U.S. inflation rate leaps to 8.5%, CPI shows, as higher gas prices slam consumers
But core inflation, which excludes food and energy, rose just 0.3% in March for the smallest increase in six months and a potential sign that the surging cost of living may be peaking.
“We think inflation is going to fall ”this year, said Gundlach, but remain elevated. He predicted that it will probably fall to around 6%.
Gundlach also lamented a rough 2022 for fixed income so far. With some core bond funds being down 12% this year, “we’re talking about a massive bear market,” he said. “Who wants to be ‘bond king’ these days?”
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That is not a good photo. Hard to make it past that part.
I second that.
Me three. You know that much about markets and can’t buy some dental work in old Mexico?
Alrighty then.
So, that’s what happened to that banjo pickin kid from DELIVERANCE.
Who would ever believe he would make it big on Wall Street!
I am writing this from the waiting area at the dentist. Just saying.
Best track record managing bonds in the U.S. Since Bill Gross exited PIMCO.
Photogenic? Not so much.
However, the statement…”“We think inflation is going to fall ”this year, said Gundlach, but remain elevated. He predicted that it will probably fall to around 6%.”…Makes him SOUND retarded.
Master stroke, the pic with the article.
Jeffry Gundlach is lookin’ short a few chromosomes, I must say….